In this week’s article, we examine the broadening wedge formation. The trade example below is called an ascending broadening wedge because it is similar to a rising wedge formation and has a broadening price pattern. The upper resistance trend line of an ascending broadening wedge slopes upward at a greater rate than the lower supporting trend line, creating an obvious broadening appearance. With ascending broadening wedge formations volume tends to increase slightly as the breakout approaches. These patterns are highly reliable once a downside break occurs, but are less reliable prior to the break of the lower trend line. Let’s have a look at how we can take advantage of this pattern below:
The put ratio backspread is a bearish strategy that involves selling a number of put options and buying more put options of the same underlying asset and expiration date at a lower strike price. It is an unlimited profit, limited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience significant downside movement in the near term. This strategy profits when the stock price makes a strong move to the downside. Maximum loss for the put backspread is limited and is incurred when the underlying asset price at expiration is at the strike price of the long puts purchased.
|Trading Symbol||OZS J7|
|Option Type||2 PUT|
|Trading Symbol||OZS J7|
|Option Type||1 PUT|
|Trading Symbol||ZS H7|
|Contract Expiry||April 2017|
As prices broke below the ascending broadening wedge pattern, significant downside can be expected. A target can be projected by taking the difference from the lowest and highest width of the wedge formation and projecting downward from the breakout point.
If the price rises above 1054.75, the position is closed at a limited loss.
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